Public Bill Committee

[Mr. Eric Illsley in the Chair]

(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 5

Rates of duty on alcoholic liquor

Question proposed [8 May], That the clause stand part of the Bill.

Question again proposed.

Colin Breed: I welcome you to the Chair, Mr. Illsley, for our deliberations this morning. We are discussing clause 5 on duty and tax on alcohol sales.
Most people would accept that if access to almost anything is increased and the cost is reduced, consumption is likely to increase, although they would not be certain by how much. Access to alcohol has increased in recent years, as have licensing hours more recently, with availability in so many different outlets. Therefore, if there is not a reasonable increase in cost—for example, in line with inflation—consumption will increase in the way that it has. That has given rise to health and, more particularly, antisocial issues, because alcohol certainly has some influence on antisocial behaviour and perhaps on domestic violence and so on.
It is important and right that the Government maintain the cost of alcohol by increasing the duty in line with inflation. There may even be a case for increasing it beyond that, but I am happy with the proposal to increase it in line with inflation.
I want to emphasise a point to the Government. There is a difference between sales from licensed premises and from off-licence premises. On the whole, and particularly more recently with the tightening up of some of the licensing arrangements, licensees of public houses and so on have been more responsible. They exercise more control and if they fall out of line, they may have conditions placed on their licence or even lose it. In fact, only last week or the week before, a licensee in my constituency lost his licence because of problems inside and outside the premises. That is a warning to others.
I find in my constituency, as other hon. Members may find in their constituencies, that much of the antisocial behaviour and binge drinking on the streets, particularly under-age drinking, usually emanate from off-licence sales, which are far less protected by legislation and more likely to provide people with alcohol when they should not have it, either because they are already intoxicated or they are under age.
 In recent times, pubs have been hit with more legislation, higher energy costs and so on, yet supermarkets have promotions that reduce the cost. The differential between the two outlets in terms of access and cost has become rather too wide. Have Treasury Ministers or the Government studied the option of an aspect of variable duty? Perhaps they could provide a different rate of duty for those sales made from off-licences and those made from on-licences, which would recognise the issue about the social aspects and availability. I believe that there is a case for at least considering some sort of differential rate for off-licence and on-licence sales of alcohol.
In passing, can I request an explanation of the treatment of the spirits tax? I think that the hon. Member for Wolverhampton, South-West referred to this earlier in our deliberations on the clause. I am not certain why that tax has been frozen for some time. It might well be a measure to protect the Scotch whisky industry and, in my part of the world, Plymouth gin sales, but that seems a little strange in terms of our promotion of free trade and so on. It might mean that the tax on spirits was out of line, and so it has been frozen to get it back into line. If that is the case, when do we anticipate that spirits taxation will be back in line so that it can start to increase again? However, the Financial Secretary might be able to give us another explanation.

Paul Goodman: The explanation given last year was that spirits are taxed significantly more than beer, so let us see whether the Financial Secretary gives the same explanation this year.

Colin Breed: That would fit in with the suggestion that I made earlier about the tax being out of line. If that is the case, it would be interesting to know when spirits will be back in line so that taxes on spirits can be increased in line with those on other alcohol sales.

Philip Dunne: It is a great pleasure to see you in the Chair today, Mr. Illsley. I want to raise two issues about the clause. First, I want to echo some of the comments from the hon. Member for Plymouth—

Colin Breed: For South-East Cornwall.

Philip Dunne: I think I can be forgiven that mistake.
There is a question about the distinction between on-trade and off-trade in respect of the increased duties for beer. It is particularly pertinent this year given the substantial increase in costs that have been imposed on the on-licence pub trade by the ban on smoking in public places. Publicans up and down the country have had to invest significantly in their pubs to retain their volume of business. The evidence from other countries that have already imposed a smoking ban—Scotland, and Ireland last year—is that there is a marked decline in trade in many pubs that do not offer food. Consequently, pubs are not only having to increase their costs but they are seeing their sales decline. To hit them with another increase in duty at the same time seems unduly harsh.

James McGovern: The hon. Gentleman mentions the decline in trade in some pubs in Scotland that do not sell food. Does he agree that pubs in Scotland that sell food have seen a marked increase in trade?

Philip Dunne: The hon. Gentleman is clearly a much greater expert than I am on the state of the pub trade in Scotland. It would not surprise me if pubs selling quality food did better. In my constituency, we have a growing reputation—I believe the Financial Secretary is aware of this—for the quality of food in our pubs, which attracts tourists to the area. Providing that requires a considerable investment to upgrade the kitchens and catering arrangements. That costs publicans money, which is why there is a case for considering a differential rate of duty for on-trade and off-trade alcohol sales.

Paul Goodman: The British Beer and Pub Association claims that sales in Ireland fell by 7 per cent., so presumably that factors in pubs that sold food and those that did not. It would be interesting if the Financial Secretary could give us a total figure for Scotland, as well as for—[Interruption.] No one has yet referred to whether sales have risen or fallen in pubs in Wales, whether food is served or not. I am sure that the Financial Secretary, who is nearly always able to answer as many questions as we ask, will be able to answer that, too.

Philip Dunne: I am grateful for that intervention. Like my hon. Friend, I should be interested to know what is happening in Wales. My constituency is adjacent to Wales, so that issue is something on which I could do some research for when we next discuss it.
Having looked through the Red Book, I am confused about the impact of the proposed changes to alcohol duty, so I should be grateful if the Financial Secretary could clear that up for me. Table A1, on page 209, shows that the receipts to the Revenue appear to have declined in real terms over the three years identified, although in nominal terms they are of course rising significantly. I assume that that is to do with the differential on spirits not being increased in line with inflation. However, I should be grateful if the Financial Secretary could confirm that, because the inflation rate of 3.4 per cent. that has been used exceeds the Government’s favoured measure of inflation, but is less than the retail prices index measure of inflation. I should also appreciate it if he would say which measure of inflation has been used to uprate duty, and from what time.

Adam Afriyie: Does my hon. Friend share my concern that talking about a just-below-inflationary increase in duties ignores the overall inflation of the price of those goods? If inflation is 5 per cent. and the price of a good rises by that much, there will also be the additional cost of the increase in the rate of duty, which means that the rate of inflation is in fact 7.5 per cent. The rate of increase in the duty on a good therefore increases the rate of inflation on that good overall.

Philip Dunne: I am grateful to my hon. Friend. Undoubtedly, if the price of a good and the duty on that good both rise, the overall cost of that good will rise by significantly more than the rate of inflation. Beer is currently a very marginal product, with brewers’ profits a matter of just 1p or 2p a pint when the Government are now taking substantially more than that, as we can tell from the measure.
The main issue that I want to cover, however, is duty on wine where the differential, to which my hon. Friend the Member for Wycombe referred, has been restored between still and sparkling wine. That contrasts with the Government’s approach three years ago, when the duty on sparkling wine was frozen. I should appreciate it if the Financial Secretary could explain why the Government have made such a U-turn so soon after deciding to freeze the duty on sparkling wine.
There is a marked distinction between the tax-raising approach that all Governments in this country have taken towards wine and the approach adopted by many of our partner countries in Europe, not least the wine producers. As we move into an era of accelerating climate change—as was evident last month—there is an increasing interest in the production of wine in this country, which needs to be taken seriously.
For those hon. Members who are not familiar with the rates of duty in our main competitor economies in Europe, I have taken the trouble of looking them up. In France, for example, which as everybody knows is one of the largest producers, the rate of duty per hectare litre is €3.4. In Italy the rate is zero and in Germany it is zero, too. To use euros as a comparator currency, the rate in the UK is—wait for it—€253.97 per hectare litre. That is a major barrier to the effective production of wine in this country, compared with our competitor countries.
I have done a little research into what is happening in the wine production sector in this country. I am pleased to tell the Committee that under the previous Conservative Government wine production in the UK grew markedly. In 1984, which is the earliest year for which I have figures, there were 281 vineyards in the UK, with 430 hectares planted to wine. By 1996, that had risen to 408 vineyards and 965 hectares, so the hectares planted had roughly doubled. I very much regret to say that under the Labour Government, the area planted to vines has declined markedly. It was down to a mere 350 vineyards in 2005, with only 793 hectares planted. I shall not attempt to draw a direct parallel between the political complexion and the propensity for vineyard operators to decide to plant vines, but the fact that duty has risen so significantly on wine compared with other agricultural produce may have had something to do with it.

Rob Marris: I do not know whether the hon. Gentleman has them, but I strongly suspect that if he looks at the comparative figures for the major producers in France, Italy and Spain, he will find that the proportional decline in hectarage has been far greater. It is because of the quality of wine going up and the number of hectares under cultivation going down.

Philip Dunne: I readily accept that the biggest influence on wine production around the world has been the advent of the new wine producing regions outside Europe. The largest volume of wine imported into this country comes from South Africa, rather than France. The entry of South Africa, Australia, Chile and other markets and new producers is having an impact on traditional European producers. Proportionately this country is a tiny producer, but we are seeking to grow.
 I have also looked at the yield of wine produced from our acreages and it struck a chord that in 1996 the yield reached a record level of 33.7 litres per hectare. It declined in 1997 to a mere 8.2 litres per hectare—the worst yield on record. While there was jubilation in many parts of the country at the advent of a new Government, with corks popping from many bottles of sparkling wine and champagne all over the metropolitan areas of Millbank, there was a very significant reduction in yield.
The point I am trying to make is that interest in domestic wine production has increased. I recently visited the Ludlow Food Centre in my constituency which opened last month and counted five bottles of regional wine that had been produced within a 30 mile radius of this emporium for local food, which I commend to any visitors to the west midlands. There is undoubtedly growing interest in this diversification in agriculture.

Colin Breed: If we are not careful we will all get in plugs for own areas. There has been a substantial increase in wine growing in Cornwall, partly because of the weather. We would all like to see that increased. Does the hon. Gentleman suggest that, like the Scotch whisky industry, which has perhaps had some preferential treatment, British winegrowers should be given some assistance to help to promote British wine, with the creation a variable duty for British-produced wine?

Philip Dunne: The hon. Gentleman pre-empts precisely what I was going to suggest. I know there are difficulties in distinguishing between country of origin, and under the state aid rules it would be a bit challenging to devise a form of duty that is geographically based. I think that Scotch whisky is separate from wine because it is treated in precisely the same way as other spirits. I do not believe that there is a differential rate of taxation for Scotch as opposed to gin or vodka, whether produced in this country or elsewhere. There are, however, special rules for cider, which is primarily because this country was one of the very few countries in the world that produced alcoholic apple juice in the form of cider.
I am sure that it is not beyond the wit of the Treasury to devise a scheme that would allow a preferential rate for domestic production. I urge the Minister to give consideration to that ahead of next year’s Budget.

James Duddridge: I welcome you to the Chair, Mr. Illsley. This is my first contribution to this, or indeed any, Finance Bill. I have spoken to a number of colleagues for advice, and I understand that so long as I pepper my speech with constant references to Mrs. Duddridge I will not go too far wrong. I thank my hon. Friend the Member for South-West Hertfordshire for that advice.
I do not know whether I need to declare an interest as a member of the Campaign for Real Ale. Indeed, I judged the real ale competition this year. I do not wish to use my membership of that organisation or, indeed, of the all-party beer group to lobby for that interest, but I do want to raise some more general points. The Budget has always been an exciting point in the political calendar, and the duty levied on booze and fags—or perhaps I should say alcohol and cigarettes—has always produced headlines. I rather suspect that the Government enjoy the fact that the headlines about cigarettes and alcohol put them, rather than a more substantive analysis of the detail of the Budget, high on people’s lists.
However, it is unhelpful to the drinks industry to change taxation at such short notice and so frequently. I would be interested to find out whether the Treasury has any plans to regularise the situation and put in a bit of long-term planning. Then we could say to the drinks industry that we would, for example, look at alcohol duty rates over the next three years. I note that in three of the past 10 years there were no increases in duty. That might have made business planning difficult. Perhaps the Treasury could introduce proposals to produce a little more consistency.
I note that it has been suggested in previous debates that tax codes might be getting a little too long. What consideration has the Treasury given to simplifying the taxation of alcohol? Rather than being complicated by spirits, wine and beer, it should take account of the amount of alcohol. I know that the Minister has said that this is not a health measure but a revenue measure, but it is the amount of absolute alcohol that does the damage rather than just the consumption of volume.
 I should also be interested in the Minister’s comments on beer and micro-breweries. I have a good micro-brewery, Blanchfields, in my constituency, which was very supportive during the general election by putting out the “Tory Tipple”, of which much was consumed. Such breweries, rather like home-grown wine producers, need a particular level of support. It concerns us all that on every high street we see the same shops, pubs and other retailers. It is a great disappointment that the Cork and Cheese in my constituency, which is typical of a number real-ale pubs around the country, is closing down due to a number of pressures, taxation on alcohol being one of them and the smoking ban another. In that case, there were some local issues as well.
 On the duty on spirits, I have always been confused by the fact that spirits and beer are treated differently. Earlier contributions mentioned bringing them in line rather than taxing them differently. Again, it would make a lot of sense to have a consistent plan for the treatment of alcohol that did not distinguish between different groups. I recognise that we are, for example, great producers of cider. However, as the hon. Member for Falmouth and Camborne mentioned in a previous debate, we treat strong beers differently, but there are also strong ciders. Having spoken to a number of constituents with mental health problems, I know that some of them use the phrase “self-medication” to describe simply knocking oneself out with the strongest beer or cider possible, so I think that there is a case for considering strong beers and strong ciders together.

Rob Marris: The hon. Gentleman talks about simplifying the rates of duty on alcohol, but does he think that the micro-brewery in his constituency would welcome such a simplification, which would get rid of the tax break that the Labour Government gave to encourage micro-breweries? Does he think that beer producers, such as Marston’s in my constituency, which is one of the country’s major producers, would welcome a narrowing of the differentials between beer and wine, which would thereby put beer-producing jobs in this country at risk to the benefit of wine-producing jobs, principally abroad?

James Duddridge: There will be always be special pleading of cases. As a beer drinker, I appreciate the hon. Gentleman’s point, but it is important to simplify the legislation for the longer term. There are great inconsistencies in treating different types of alcohol differently.
On the consumption of alcohol from off-licences, clubs and pubs, the main problem in my constituency, unlike those of other hon. Members who have spoken, is not with alcohol sold in off-licences, but with cheap alcohol sold in pubs and clubs. One of the biggest social problems in Southend is that people come from London and all around to drink in the town and then get caught up in events that lead to crime and social disorder. I urge the Treasury to consider introducing measures that would approach the taxation of alcohol as a whole and not simply as a revenue measure.

Adam Afriyie: An esteemed war-time Prime Minister once said:
“I have taken more out of alcohol than alcohol has taken out of me.”
 I wonder whether that attitude is reflected in the slightly less well-esteemed Treasury, given the amount of revenue that it raises from alcoholic beverages. The Government seem to be committed to continually increasing the duties on beer, cider and wine broadly in line with inflation, although the rises have been slightly below the inflation rate in the past 10 years. The duties levelled on spirits, on the other hand, seem to be trailing inflation enormously. Why is that? What is so special about spirits? Is it their alcoholic content compared with those of beer, wine and cider, or is it about how they are used socially? What is fundamentally different? What social research studies underpin that clear policy of the past decade?
When I asked whether the increases in duty were driven by economics or social policy considerations, the Minister said that they were driven by revenue considerations. Clearly those considerations are not mutually exclusive, because raising the duties on alcoholic beverages will have an impact on their consumption. Of course, the rate of duty, VAT or any other tax on a good will affect its consumption. He seemed to imply, although I am not sure whether this is what he meant, that the changes in duties would not affect people’s behaviour and that the social policies and social outcomes that we seek should be effected through other means.
I have a degree in economics and I have been in business for about 20 years, and it is clear to me that if you change the price of a good or service, the demand for it and people’s behaviour towards it changes. [Interruption.] I am happy to take an intervention if anyone wishes to intervene. All the evidence and economics say that there is a direct impact on people’s behaviour in relation to alcohol.

Paul Goodman: I am sure that the Financial Secretary will correct me if I am wrong, but I recall that in the debate on tobacco in last year’s Finance Bill, he mentioned the health considerations explicitly near to the beginning of his remarks. It is clear that the Government do not apply to alcohol the considerations that they apply to tobacco.

Adam Afriyie: I welcome that intervention, because that was my reading of the situation. I was concerned about the inconsistency. I am quite sure that the provision could not possibly be before us for the sake of expedience during this debate, but I should welcome clarification of the Treasury’s position on the social versus revenue-raising outcomes of such policies.
I accept the argument that a small change in price will have only a marginal impact on a marginal group of people. However, it is undeniable that there will be an impact. I should welcome clarification about that point when the Financial Secretary has reflected on it.
The tax system is used to change behaviours in many different areas of our lives. If one visits any magistrates court, it becomes abundantly clear that alcohol fuels a great deal of antisocial behaviour—there is no doubt about that—and violent crime. When we consider the rate of duty on, and our fiscal treatment of, alcohol, above many other products and services in society, the social consequences must be uppermost in our minds.
If alcohol were placed on the scale of harm by the Advisory Council on the Misuse of Drugs, it would rate highly. In terms of the harm that it does to the individual and to society, it would rate more highly than many other illicit drugs that we consider to be completely unacceptable. I am not arguing that we should ban alcohol; I simply seek to probe the thinking behind the consistent link of duties to inflation, with various rates on various products, because it would be quite easy to stagger on doing the same thing. The Bill is an opportunity to probe the Government’s thinking and to consider what outcomes we seek—other than tax-raising outcomes.
 Given the harm, misery and upset that alcohol often causes, I must ask some specific questions about the Financial Secretary’s consideration of the social consequences of the Government’s duty regime. What studies has his Department or the Department of Health undertaken into the impact of fiscal measures on the behaviour of alcohol consumers? What discussions has he had with the Home Office, the Department of Health and the Advisory Council on the Misuse of Drugs  about the clause? I am sure that he has considered the matter very carefully, but if he had not had any discussions with any such groups about the continual inflation-linked rise in duties, it would not be a particularly helpful way to proceed when we are concerned about the harm that the misuse of alcohol does to society.
There is an inconsistent approach. On the one hand, the Government appear to be liberalising alcohol use with their licensing measures and their vision of Britain as a more continental user of alcohol. There is a lot more drinking of wine in the afternoon sunshine nowadays—

Brooks Newmark: Especially today.

Adam Afriyie: Lots of champagne today.
On the other hand, however, the Government hand out antisocial behaviour orders and spend hundreds of millions of pounds on dealing with the social consequences. There must be consistency between the policy outcome of the clause before us and the other measures. I am sure that there must be, but I should welcome an explanation of how it makes sense.

Stephen Hesford: Is the hon. Gentleman’s experience the same as mine? The number of people using the accident and emergency unit in my constituency on Friday and Saturday nights has gone down since the liberalisation.

Adam Afriyie: I welcome that intervention. I am delighted that the hon. Gentleman has an A and E unit in his constituency and that the social outcomes of the licensing changes in his area appear to be moderately positive. That is not my experience in my area, however; nor does it appear to be the experience in many other areas around the country.
 There must be a connection between the duty on, and the price of, alcohol and the level of alcohol usage. The hon. Gentleman is considering the social outcome and the health outcome in terms of visits to A and E, normally in the early hours of the morning. I am probing to find out the direction that the Government are taking and the philosophy behind it. What is the link between the different issues? Does the Government’s policy in this area make sense? Is it consistent? If the Financial Secretary persists—I feel sure that he will not—with the assertion that fiscal changes to duty do not have an impact on consumption, that will sadden me to some degree, not only because it does not make sense in the real world, but because it means that all the other Government policies to change behaviour must be faulty.
We have heard that air passenger duty is supposed to reduce the number of flights, for example. It is a revenue-raising measure, a bit like the duty on alcohol, but the Government have suggested that it will reduce the number of flights and so reduce carbon emissions by several million tonnes, although I do not remember the exact figure. The level of duty clearly has an impact on behaviour in that area, or at least the Government suggest that it does. Would the Financial Secretary argue that higher vehicle excise duty for vehicles with higher carbon emissions has no impact on behaviour? I do not believe so. We have only 10 or 12 low-carbon homes at the moment, if any at all—

Mark Francois: None.

Adam Afriyie: We have none? My goodness. [Interruption.] Is it 12? We do not know. I thank my hon. Friend for his intervention. We are told that taxation will be reduced to encourage the building of low-carbon homes.

Eric Illsley: Order. The hon. Gentleman is straying from the subject of the debate.

Adam Afriyie: I seek merely to draw the parallel with other areas of Government policy, where there is clear understanding that the level of taxation and the price of goods and services affect consumption and therefore affect social and policy outcomes. There seems to be a deep inconsistency.
I give the Government credit for being a modernising Government in many respects.

Brooks Newmark: Why?

Adam Afriyie: For using the language of modernisation. When I was reading through the Bill and the accompanying notes, however, I noticed references to hectolitres. Perhaps the Financial Secretary will explain why we continue to use that term. Why do not we use litres or some other standard unit of measurement? Why do we not take the opportunity to do so today, rather than stick with a marginally old-fashioned measure? There may be good reasons; I simply make the observation.
In another area of society, motorists are asked to pay money towards victims of crime who have nothing to do with the motoring offence. Has the Financial Secretary given any consideration to some form of hypothecation? I am not proposing it, but has he considered direct hypothecation from the duties raised on alcohol to health care and crime reduction?
It seems that the Government are blindly staggering on with the same regime in this Bill. I look forward to hearing the Financial Secretary’s comments on the issues that I have raised. I am particularly interested in the consistency, if there is any, between the duty regime on alcoholic beverages and the other Government policies that seek to change behaviour by changing taxation on the goods and services that we consider good or bad.

John Healey: I welcome you to the Chair, Mr. Illsley, for the first time on a Finance Bill; I am delighted to see you. I do not know if that counts as a promotion or a penalty, in terms of the Speaker’s Panel of Chairmen.

Eric Illsley: Penance.

John Healey: We will do our best as a Committee to behave and make your job as easy as possible, Mr. Illsley.
By tradition, this Committee tends to take a particularly close interest in, and have particularly long debates on, the clauses in the Finance Bill that are related to alcohol. Today is no exception.
Perhaps I could start by welcoming the newcomer to the Committee, the hon. Member for Rochford and Southend, East. [Hon. Members: “Where is he?”] I am sorry that he has not been able to stay longer with us. He took his files and departed a little earlier. I also welcome his membership of the Campaign for Real Ale; I must say that that is a very fine organisation, championing a very fine cause.
The hon. Gentleman asked me about the simplification of the alcohol legislative and taxation regime. He is new to the Committee, so he probably did not see that in the 2006 Budget we announced more than 30 simplification measures for the alcohol regime. In Budget 2007, we announced that there would be more discussions with the industry about further, longer-term reforms and simplifications that we can introduce into what, after all, is an excise regime that is centuries old and ripe for the sort of fairly radical reform that we are undertaking.

Brooks Newmark: I can only assume that, as with all things connected with this Government, while they give with one hand—that is by perhaps reducing the number of taxations—they take with the other, which probably explains why Tolley’s tax guide has increased from roughly 3,900 pages to 10,200 pages.

John Healey: May I suggest that the hon. Gentleman consults the alcohol industry’s representative groups? If he does, he will see how welcome they find the moves that we are taking and they will tell him how involved they are in these measures. That may be something that he wishes to pursue after this Committee hearing.
May I also welcome the hon. Member for Windsor and his contribution, which rounded off the debate? I must say that he made what seemed to me an extraordinary point, by suggesting that somehow we should not be using tax to raise revenues for the public purse. That is a quite extraordinary proposition, and frankly it was implicit in his whole line of argument.

Adam Afriyie: I consider that comment to be rather unfair. I made it clear all the way along that the implication was that fiscal changes have a direct impact on behaviour, and I was calling on him to explain why he was suggesting that these measures would not have an impact on behaviour.

John Healey: Let me try to be a little fairer in the second point that I wanted to make about the hon. Gentleman’s contribution to the debate. He told the Committee that he is an economics graduate and also that he had spent 20 years in business. I find it extraordinary, therefore, that he has not come across the concept of demand elasticity in that time. Clearly that concept applies differently to beer, fags, cars and homes. Quite honestly, that is the simple answer to the question that he was raising.

Adam Afriyie: I have a thorough understanding of economics, and by simply mentioning the word elasticity the Financial Secretary has acknowledged that there is an elasticity of supply and demand for every good or service. So he has made my point for me, and I thank him for doing so.

John Healey: The demand for some things is relatively inelastic, as in the case of beer, so a rise in price does not necessarily affect demand directly or substantially; that is the nature of the concept of elasticity.
If the hon. Gentleman has a degree in economics, he probably knows the answer to one of the questions that he asked me, which was about hectolitres; a hectolitre is 100 litres. The reason that we continue to use hectolitres is that they are the measure set out in the European legislation that we have to implement and reflect in this country. I am afraid that there is no way around that.
The hon. Gentleman also asked me about the discussions that we had with the Department of Health and the Home Office in the run-up to the Budget. Of course, we have regular and detailed discussions with both Departments, and other Departments, in preparing the Budget. I must tell him, and the Committee, that I have the privilege, as the Treasury Minister responsible, to sit on the ministerial alcohol group. One of the main things with which that group has been concerned in recent months is the preparation for the summer launch of a renewed alcohol harm reduction strategy, which will draw on the capacity, the concerns and the contribution that all Government Departments might make to tackling that problem.
I am glad that the hon. Member for South-East Cornwall is happy with our proposals for a duty increase in line with inflation, as in clause 5. He is right about the increasing difference between on and off-trade sales, which members of the Committee would acknowledge principally reflects the changing patterns of consumption and leisure time. I must tell him and the hon. Member for Ludlow, who raised the same point, that it would not be legal for us to consider a duty differential for sales that depend on the location of off and on-trade. I have considered it, but that is the legal position; it is simply not possible.
I turn now to the series of comments that were made by the hon. Member for Wycombe, speaking from the Conservative Front Bench on Tuesday at Question Time. He started by observing rightly that alcohol duty changes in this Bill are contained in one clause. He asked why, as in last year’s Finance Bill it was two clauses. I must be honest: it is simply a reflection of the preference of parliamentary counsel. [Interruption.] My hon. Friend the Member for Wolverhampton, South-West murmurs and grunts, but he will appreciate the point that even parliamentary counsel, unlikely as this may seem to some, have a personal drafting style. It is that style that has given us such great assistance with this Finance Bill, and is reflected in the fact that we have one clause rather than two.
The hon. Member for Wycombe spent some time painting what I thought was a negative picture of the brewing industry in Britain. It is certainly the case that there is a long-term decline in overall beer sales. However, within that market in Britain now, we have vibrancy, innovation, and an increasing range of choice in beers, driven not least by an increasing number of local micro-breweries. The small breweries relief has been an important part of being able to encourage such growth and diversity. I know that the Campaign for Real Ale welcomes that. Small breweries often bring a boost to local economies, many of them in rural areas. They provide valuable employment in those areas, and we calculate that more than 130 new breweries have opened since we introduced the small breweries relief, creating more than 1,000 jobs in the industry.
I am not sure that I like the sound of the Tory tipple of the hon. Member for Rochford and Southend, East. However, I could recommend Wentworth pale ale, which is a product of the Wentworth brewery in my constituency. It is a small brewery that has benefited significantly from the small breweries relief. In fact, Steven Beech, the managing director of Wentworth brewery, recently said to me about the small breweries relief:
“This is undoubtedly as far as Wentworth Brewery is concerned a major and very positive step... The brewery has reaped the benefits in an increase in turnover and a corresponding increase to our workforce.”
He went on to confirm that turnover has increased by 50 per cent., and the work force have also increased by over a half. That is direct proof, he said, of the effectiveness of the small breweries relief. I suspect that a number of other members of the Committee have similar breweries in their constituencies.
I turn now to another source of concern that the hon. Member for Wycombe and other members of the Committee raised: the smoking ban in England from the beginning of July. It is interesting to note that just five days after the Budget, Greene King, one of this country’s significant and good brewers, was upbeat about the results of an independent survey that it reported, because they pointed to the opportunities that many brewers and pub-chain owners see in the smoking ban. The survey showed that one in three young couples with families who avoided pubs would consider buying family meals following the ban and that more women aged 45 to 54 were likely to visit following it.
Although it is early days, even in Ireland, certainly in Scotland and even more so in Wales, the experience suggests that the impact will vary from pub to pub and that, on balance, the status quo is likely to be preserved in the longer term. It is clear that pubs that do not prepare for the ban are likely to lose out.

Ian Lucas: Picking up on that point, it is very much the case that in my constituency and Wales more widely the smoking ban that was introduced at the beginning of April has been warmly welcomed. A number of pubs pre-empted the ban themselves. I know that one pub introduced a ban in December and commercially has thrived as a consequence.

John Healey: My hon. Friend’s experience in Wrexham is interesting and not atypical of the reports that I receive from hon. Members who represent constituencies in Scotland and Wales. He is right to say that the pubs that prepare can benefit rather than lose out from the ban—the experience is clear to that extent. On balance, landlords are positive about the prospect of the smoking ban. It will also help some of them, as well as some of their customers, to give up smoking.
Finally, the hon. Member for Wycombe made comments and raised questions on the state of the industry.

Paul Goodman: The Financial Secretary has quoted at least one survey on the effect of the smoking ban, but the British Beer and Pub Association has claimed that sales fell by 7 per cent. in Ireland. Has the Treasury studied the effect of the ban in Ireland? Can he confirm the figure that I have given?

John Healey: I can confirm two things. First, I am aware of the representations and points made by the BBPA, which I saw before the Budget, as I do every year. Rob Haywood is a good chief executive of that association and represents the industry effectively. Secondly, we carefully study such evidence as it emerges from Ireland, Scotland and Wales. On balance, across the board the conclusion that we and others are drawing is that in the longer term the ban does not appear to be having a serious effect on the pub industry.
The hon. Gentleman also mentioned higher energy and raw material costs, which was a point put to me by the BBPA, and one that I also made in my opening remarks on the clause. He recognised in the end the balanced decisions that we must take in government, and I hope that he will take that stance when we come to decide whether to allow the clause to stand part of the Bill. We have tried to recognise the industry’s concerns, but at the same time we are trying to maintain the value of an important revenue stream to the public purse. That is essential to help us to support our investment in public services.
A number of hon. Members raised the question of using tax somehow to price and regulate the consumption of alcohol. They are right to say that it has been a long-standing element of the policy approach to the taxation of tobacco; that is true of the past 10 years of Government and was certainly true of the last 10 to 20 years of the previous Government. Doubtless, we shall come on to consider some of those questions in discussing the next clause.
I made the point to the hon. Member for Windsor that each case is different. It is clearly right that we examine the evidence, and the case has not yet been made that tax would be an effective way to reduce the social problems that come from the abuse of alcohol by a small, but nevertheless visible, minority. The Government remain of the view that social legislation and regulation, and active encouragement of pressure on the trade through self-regulation are better ways to tackle our concerns in our constituencies and nationally about the harm—the social problems and health difficulties—caused by the abuse of alcohol.

Adam Afriyie: Considering the scale of harm done to society by antisocial behaviour resulting from alcohol abuse, can the Minister run off a quick list of studies that the Treasury or the Department of Health have commissioned on the elasticity of the demand and supply of alcoholic beverages?

John Healey: I will do better than that. I will send the hon. Gentleman a copy of the publication in which we set out our modelling and our assessment of these issues, as we have done every year.
I am disappointed that at the end of the debate I am still not clear whether it is the policy of the hon. Member for Wycombe to raise taxes on beer and wine to take the price of those drinks out of people’s reach. Perhaps we will have to wait a little longer to find out. He would certainly have the support of some of his hon. Friends on the Back Benches, and of his wider party, for such a policy. It is the implication of this morning’s contributions and it is something that we will return to.
 I return to the balance of taxation between different types of drinks. Hon. Members were right to point out that we have frozen the duty on spirits in 10 successive Budgets, and I am proud of that. Spirits are still taxed more heavily than any other form of alcoholic drink; 10 years ago, they were very much more heavily taxed. As I have explained to successive Finance Bill Committees, we have been consistent in that policy. Our judgment in respect of excise duty on alcohol is that there should be a fairer balance of taxation between the different alcoholic drinks—I repeat, a fairer balance, not an equalisation of the rates; the two are fundamentally different.
It is not our ultimate policy aim to equalise the taxation on different types of alcohol and drinks. The reason is self-evident: if it was the sole and principal aim of taxation policy decisions, which was rigidly adhered to, there would be little or no scope for taking into account other factors or pressures that may be relevant to a particular industry.
For example, in the last four Budgets, we have been able to freeze the duty on cider; in fact, we cut it in recent years, irrespective of the decision that we took on other alcoholic drinks, because the cider industry in Britain was seriously struggling and the industry is very important in supporting farmers in local areas and the rural economies. We could take that decision because of the economic circumstances in that industry, which were different from those relating to spirits, beer or wine. We need the scope to take broader and different dimensions into account when taking those decisions.

Colin Breed: That decision was welcomed, and in a broader sense it was especially helpful to the agriculture industry, even in Cornwall, which is not a cider area, but sends its apples elsewhere. Cider is not only produced in Somerset and Herefordshire. Although the Minister may not imbibe the Tory tipple, he might well sample a very good cider called Thatchers Ruin if he was in Somerset.

John Healey: I have a lot of time for Mr. Thatcher, who has been a leading figure in the National Association of Cider Makers, and I have enjoyed my contact with him and his firm, although not his product, in recent years.
It is true that our decision substantially helped the cider industry. Clearances of cider in 2005-06 rose by 15 per cent., and all the market research and projections predict further growth in the industry for this coming year. It was in those circumstances that we took the decision this year not to freeze duty on cider but to raise it in line with inflation, as we are doing with beer and wine.
I was asked by the hon. Members for Ludlow and for Wycombe about duty on sparkling wine. They may be aware that the duty on sparkling wine has been frozen in the past six budgets. The level of duty has therefore fallen in real terms by a full 16 per cent. since 1997—in anybody’s book, a supportive tax treatment of sparkling wine over the years—and, over the past decade, sales of sparkling wine have nearly doubled. We took all those factors into account when making decisions for the Budget and the Bill.
 I want to deal with the points that have been raised by the Committee. I hope that Members will indulge me a little further as I deal with two or three matters that the hon. Member for Ludlow raised but that I have not yet touched on. He asked about the figures in the Red Book. The projections of changes in alcohol receipts as a result of the Budget decisions announced in March, and the small reduction, take account of the decision to freeze spirits duty in the Budget. The measure of inflation that we use for those and other projections in the Red Book is well established. It is the quarter three retail prices index forecast for the year ahead.
 The hon. Gentleman then dealt in some detail with the wine industry. In particular, he wanted to know whether some sort of preferential treatment for UK-produced wine might be possible. There are several points to bear in mind. First, all wine sold in the UK, whatever its country of origin, is taxed at the same rate. Secondly, the output of the UK wine industry, which is extremely good and increasingly well regarded worldwide, still represents only about 1 per cent. of wine consumption in the UK. According to the analysis of the Department for Environment, Food and Rural Affairs, it is regarded as a high-quality product—that is increasingly true of UK sparkling wines—but the tax treatment is entirely consistent across the board for products sold in this county, whatever their country of origin.
 The hon. Gentleman then asked whether there could be a special taxation regime to favour UK-produced wine. Unfortunately—from his point of view—were we to introduce such a regime in Britain, it would constitute an illegal state aid. We would be legally prevented from doing that, so we cannot consider or pursue such a policy option.
I hope that I have dealt with the comments and concerns of members of the Committee, and that the indications that we have had during the debate mean that both sides of the Committee will be content to let the clause stand part of the Bill.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.

Clause 6

Rates of tobacco products duty

Question proposed, That the clause stand part of the Bill.

Brooks Newmark: You took me by surprise, Mr. Illsley.

Eric Illsley: In that case, I shall call the Minister.

John Healey: I wish to move the clause formally.

Brooks Newmark: As always, I turn to the explanatory notes when considering clauses. Paragraphs 4 and 5, which are in the background note section, are important because they show the thrust of the Government’s objective, and I shall reflect on them later when questioning the Minister.
The background note begins by saying:
“Keeping tobacco prices high is one of a number of measures set out in the Government White Paper on tobacco, Smoking Kills, intended to help existing smokers quit the habit”.
The Government are seeking, in part at least, to change behaviour. I appreciate that there are other ways of trying to change behaviour, but clearly this is a linchpin in changing behaviour. The background note continues:
“Research has consistently shown that the price of cigarettes affects demand. Cigarette prices in the UK are now at historically high levels.”
That goes back to the Minister’s discussion with my hon. Friend the Member for Windsor about price elasticity, what that does and how it impacts on demand. In normal cases I would agree that a higher price has an impact on demand. Unfortunately, it does not take into account—I shall go into this later—the increase in the illicit trade of cigarettes, particularly hand-rolled cigarettes. I want to probe a little further the assumptions about changing behaviour, price elasticity and the impact on the increase in supply of illicit tobacco.
I begin by noting that despite consistent increases in tobacco duty, revenue has been broadly flat for the past few years, given that the out-turn in 2002-03 was the same as the projection for 2007-08. Table C8 onpage 281 of the Red Book shows that tobacco duties were £8 billion in 2005-06 and £8.1 billion in 2006-07, and are projected to be £8.1 billion in 2007-08, so the increase has been relatively flat.
If duty rates are indexed to maintain the real price of tobacco, does the Treasury attribute the real-terms decline in receipts to there being fewer smokers or more cunning smugglers? Is the purpose of tobacco duty to raise revenue or to change behaviour, or a bit of both?
 There are mixed messages here, as elsewhere. The Government say that smoking kills half of all smokers. Organised criminal gangs who smuggle tobacco provide a cheap and unregulated supply, which undermines the Government’s policy of using tax to maintain the high price of tobacco and to help to reduce smoking, especially among the young. That implies that the illicit trade has a measurable impact on public health. Is the Government’s anti-smuggling strategy focused on improving public health or safeguarding revenue, and what is their priority? Increasing tax has the potential to stimulate illicit trade and to provide better access for youngsters to indulge in tobacco products; hence the two objectives seem to be slightly contradictory.
The growth area in the illicit tobacco trade is in counterfeiting, which has both revenue and public health consequences. Last year, HMRC and the Treasury published findings that between 85 per cent. and 100 per cent. of cheap cigarettes sold in London were counterfeit. What is the latest estimate of the impact of counterfeiting on both public health and revenue? I shall be interested to hear whether the Minister has done some homework on that.
Last year, HMRC and the Treasury published a document with the tongue-twisting title, “New responses to new challenges—Reinforcing the Tackling Tobacco Smuggling Strategy”. Given that the Government admit that smugglers constantly change their strategy to avoid anti-avoidance measures, can the Minister offer the Committee an update on HMRC’s evolving strategy one year on?
HMRC goes on to argue that illicit market share is falling, although it admits to a statistical uncertainty, and it has moved to a definition of the illicit market based on a range between upper and lower estimates. That range, I read, is between 10 per cent. and 19 per cent. for 2004-05. Is the Treasury satisfied that data from consumer surveys and estimates with a spread of 9 per cent. are adequate for revenue forecasting purposes?
The Comptroller and Auditor General has to audit the tobacco duty revenue forecast based on data on the illicit market share dating from 2003-04 because of a lack of more recent firm data. I believe that that was outlined in the Budget 2007. The revised National Audit Office audited assumption assumes that the underlying duty paid on cigarettes will be 3 per cent. lower than the estimated out-turn for the current year. Again, I want to ask the Minister whether the Treasury is confident that no further downward revision of revenue forecast will be necessary.
In March 2006, the HMRC-Treasury paper admitted:
“Tobacco smuggling costs £2.9bn per year in lost revenue—the equivalent to 1p off the basic rate of income tax”.
 That is equivalent to 35 per cent. of tobacco tax receipts; I get that number mathematically by 2.9 billion divided over 8.1 billion. How does that compare with HMRC’s estimate of the illicit market share as being between 10 per cent. and 19 per cent.? Would the cost of lost revenue as a percentage of total receipts not be a more useful way of judging the scale of the problem?
Is HMRC on track to meet the target for reducing the illicit market share to 13 per cent. by 2007-08, as outlined by the Government? This year’s Finance Bill contains plenty of anti-avoidance measures to protect receipts in other areas. Did Treasury officials consider the case for further legislation to tackle tobacco smuggling? Would tighter border controls help to tackle tobacco tax evasion? Would the reclaimed tobacco revenue not go some way towards paying for the new border police force suggested by the Leader of the Opposition, among others?
I read in HMRC’s report of 2005-06 that one in four cigarettes smoked in Britain is hand rolled, yet half of the hand-rolling tobacco used in the UK is thought to be illicit, costing £880 million in lost revenue in 2003-04. In fact, the major example of tax-motivated behaviour change has been the doubling of the number of those using hand-rolling tobacco since 1990. Given the continued growth in the market for hand-rolling tobacco and the level of tax evasion associated with it, is that the right kind of behaviour change for the Government to encourage?
Imperial Tobacco has said that its experience of a smoking ban in Scotland, introduced just a year ago, and the experience in other markets, such as Ireland, confirms its view that smokers will continue to smoke. Any initial dip in consumption diminishes over time. Does the Treasury concur with that assessment and how did it reach its revised forecast that the ban would lead to a loss of revenue of just £100 million in 2007-08 and £500 million in 2008-09? Finally, is it anticipated that further revisions to the projection will be necessary?

Eric Illsley: For the avoidance of any further confusion, Members will notice that a number of clauses have no amendments so far. The question will be that the clause stand part of the Bill, which will enable debate. No one is required to move the question, as it is put by the Chairman, and any Member can speak to it.

Paul Goodman: Welcome to the Chair, Mr. Illsley. The Financial Secretary began by speculating about what your presence meant in terms of the goings on in the exalted world of the Speaker’s Panel. I would not be so bold as to follow him in that, but I know that you will enjoy every minute of these proceedings and I can see that you already feel thoroughly at home.

Eric Illsley: Order. For the benefit of the Committee, it is a little disconcerting to look around the room and see that the hon. Member for Coventry, South and I are the longest-serving Members here. As a former Opposition Whip, I know a lot about Finance Bills. The disappointment is that they have changed very little since 1988.

Paul Goodman: My experience could not possibly compare to yours, Mr. Illsley. Although you may not know the background to this—I shall be very happy to tell you all about it afterwards—you will at least be pleased to see that I have been restored to my correct gender and political party in the Committee’s proceedings.

Edward Balls: We haven’t noticed.

Paul Goodman: For such an observant person as the Economic Secretary, I can scarcely believe that to be true.
Without any further ado, let me move on to what is left in the clause that my hon. Friend the Member for Braintree has not already covered in his masterly exposition. Just as with the corresponding clause in last year’s Bill, he has given the Committee a chance to explore the relationship between the rate of duty, the amount of revenue for the Treasury, and the effects as regards smuggling, counterfeit and lost revenue. There is obviously a relationship between those factors. The case for large increases in duties, which I think my hon. Friend the Member for Ludlow hinted at last year, is that they will help to reduce smoking and, on paper at least, bring in more revenue for public services. The case for lower rates, freezes or even cuts, which was hinted at last year by my hon. Friend the Member for Braintree—we were therefore able to have an interesting discussion—is that the law of unintended consequences applies. In other words, large increases will stimulate the smuggling of tobacco and counterfeit products, and thereby reduce revenue and fail to reduce smoking, as people switch from legal to illegal tobacco.
In what was his key quotation from last year—which will probably explain his thinking this year, too—the Financial Secretary acknowledged those competing pressures and trade-offs, when, with reference to a Treasury study, he said:
“The model’s main findings show that, with tobacco, we are close to the revenue maximisation point with cigarette duty. That means that any large real increase in duty rates would increase smuggling and start to reduce, not increase, revenues.”
I assume that that is the position this year, too. That analysis helps to explain why the Government abandoned the tobacco duty escalator in 2001. It also helps to make the case for this year’s inflationary rise, which we do not intend to oppose.
It is perhaps significant that the Tobacco Manufacturers Association’s response to this year’s rise has been muted. It said that the
“announcement of an inflation-only increase in tobacco duty is an indication that the Government acknowledges that tobacco duty is the cause of the UK’s high levels of smuggling and crossborder shopping”.
While calling for a “fundamental review” of policy, the association also said:
“We welcome this continued restraint but it is still an increase. It will serve only to widen the price differentials between the UK and the rest of the EU. It will further encourage smuggling and counterfeit activity and enhance the economic incentive for smokers to shop abroad or purchase tobacco products on the black market.”
None the less, the tobacco manufacturers seem on the whole to be reasonably satisfied.
The same cannot, apparently, be said for Action on Smoking and Health. As the Financial Secretary knows, sadly, we cannot please all the people all the time. ASH said that it was
“disappointed that the Chancellor missed a golden opportunity to raise the tax on tobacco above the rate of inflation”.
ASH had called for a 19p increase on a packet of 20 cigarettes, which is equivalent to a 3 per cent. increase above the inflation rate.
As I have said, we do not intend to oppose the rises. We suspect that the balance is about right. However, I should like to ask some broader questions about the Government’s anti-smuggling strategy, in which the rise proposed in the clause presumably plays a part, following the same line of inquiry as my hon. Friend the Member for Braintree.
Last year, against a background of increased freight movement and visits and a rise in the consumption of hand-rolled products, the Committee had an opportunity to hear estimates from HMRC of revenue loss from smuggling and cross-border activity. My hon. Friend mentioned the counterfeiting figures, and the estimates last year showed that after progress between 2001 and 2003, there had been a rise in the non-cross-border element in 2003-04, from £2.6 billion to £2.9 billion, and an overall rise in revenue loss from £4 billion to £4.2 billion. What are the figures for 2004-05? Has the trend corrected itself or has there been a similar decline? Has consumption fallen as it has each year since 1999?
 The Financial Secretary reminded the Committee last year that the Government’s anti-smuggling strategies are underpinned by memoranda of understanding—memoranda, not memorandums, as the hon. Member for Wolverhampton, South-West said last year; so, that is satisfactory—signed with the majority of the tobacco industry. The manufacturers clearly favour that approach, and they unsurprisingly lobby energetically for freezes or reductions in duties. It is worth noting that the Financial Secretary said last year:
“Duty cuts would not produce proportionate reductions in tobacco smuggling. Only a large cut in duty would be likely to have any significant impact on the behaviour of consumers and suppliers.”—[Official Report, Standing Committee A, 9 May 2006; c. 17.]
I assume that we can rule out such a large cut, because of the effect that it would have on revenue.
Although the approach to countering smuggling via memoranda of understanding satisfies the tobacco industry broadly, it does not meet with the approval of ASH. It says that the Government should consult formally with what it describes as “independent stakeholders”—I presume that it considers itself to be one of those independent stakeholders—and the tobacco industry on smuggling and, in particular, the development of a system of covert markings. I should like to know the Financial Secretary’s response to that idea in due course.
The Financial Secretary will be well aware that ASH also says that the Government should sign up to the agreement between the European Commission and Philip Morris International on tobacco smuggling. Under the agreement, which was signed in 2004, the company announced that it will pay the European Commission $1 billion in a landmark deal on tobacco smuggling. Under the agreement, the company is heavily penalised if its products are smuggled into EU countries. Originally, 10 member states signed up to the agreement with the Commission, and the deal meant that court action against PMI in the US was dropped.
The key elements of the agreement are seizure payments, which penalise PMI if any of its products are smuggled into the EU, and compliance protocols. The agreement is reviewed annually. The Select Committee on the Treasury said:
“We are concerned to note...that Customs have not sought a similar agreement with Philip Morris... Whether it would be better for the UK to sign the EU agreement or to seek a separate memorandum of understanding with Philip Morris depends upon the arrangements that can be negotiated with the company. But doing nothing is unacceptable.”
Again, I should like to know the Financial Secretary’s response to that point.
HMRC has traditionally argued that there would be limited financial benefit to signing such an agreement. ASH’s counter-argument is that there may not have been a clear financial benefit to date, in 2004-05, but it goes on to ask about the subsequent years looking to the future.
I have two final questions. First, do the Government fully support the development of a legally enforceable and comprehensive illicit trade protocol under the framework convention on tobacco control, the international health treaty signed by 142 parties? Secondly, what progress has been made on the development of track-and-trace technology, which allows authorities to trace supply lines and product distribution? In particular, what discussions have the Government held with other Governments—

It being twenty-five minutes past Ten o’clock,The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One o’clock.

Correction
Col. 33, line 53, Delete Mr. Timms and insert John Healey.